1-in-10 borrowers are turned down when it comes to obtaining a mortgage. Here are 5 lending exchange that can derail your mortgage applications.
Past credit history
The study found that one-in-four denied borrowers (26 percent) were turned down due to their credit history. The good news is that you are continually updating your credit history and can take steps to improve it if there are harmful items. Review your credit report to ensure it is accurate, and then work to address any adverse records before applying for a loan.
Cutting it too close on debt-to-income
Much of the trouble from the financial crisis was because borrowers were placed in homes they couldn’t pay for on a sustainable basis. As a result, mortgages have since adhered very strictly to income requirements. Stretching to buy your dream home is not advisable. Lenders are unlikely to approve borrowers whose debt-to-income ratios exceed 36 percent. Debt-to-income is your total monthly debt obligations divided by your gross monthly income, and it was the cause of 26 percent of mortgage denials in the study.
Taking out new credit before closing
Most borrowers know to avoid applying for new accounts before completing their mortgage application. That advice still applies once you are approved and are on the way to closing on a home. The length of time between initial application and closing is about 45 to 60 days. Lenders will check your credit again before closing, and material changes could affect the cost of the loan or even lead to an approval being reversed. Avoid new applications for other credit during this time.
The property is not worth the price
The lending decision evaluates two things: the borrower and the property, which is the collateral the lender will receive in the event the borrower defaults. In the study, collateral was the third-leading cause of mortgage denials, indicating the home was not worth enough to justify the requested financing. Make sure both you and a trusted home inspector both examine the property.
Sloppiness and lack of documentation
Ensure that everything in your application—from your tax records to your employment history—is accurate and you have documentation. Be proactive and gather all of the typical documentation you’ll need before you apply, so you aren’t denied a loan or delayed in closing.